I see from the Wall Street Journal that the Internal Revenue Service is subpoenaing land records information from the State of California (numerous other States having voluntarily complied), to ascertain who has either failed to pay gift tax or failed to file Form 709 even where no tax was due.
Back to basics: the annual exclusion is still $13,000 per donee; interspousals in any amounts are exempt; and all gifts must be present interests. Likewise, direct payment of medicals and educationals (see my post for 12/31/10, “Economic Substance – A Taxpayer Win”), and payments to charitables and politicals, are all exempt. If all these obtain, no 709 is due. If there are non-exempt transfers or tax is due, a 709 must be filed per taxpayer per year, and must list all gifts not exempt. Tax is due once the lifetime exclusion ($5 million) is reached. Of course, GST is a factor, but I’ll leave that to the side for now.
So suppose tax is due and unpaid. If the donee sold the property to a bona fide purchaser before IRS filed its lien, the BFP is safe, absent guilty knowledge on their part. If not, the donee had better start looking for the donor, or considering transferee liability (see my post for 3/15/11, “A Good Day for Taxpayers”). And remember, if no filing, no statute of limitations protection, so IRS could go back for years to assess and collect tax plus interest and penalties.
But what if no tax is due (probably the majority of cases)? Yes, there’s the minimum $135 Section 6651 non-filing penalty where there is a non-exempt transfer but no tax is due. But is IRS going to file liens all over California for $135 a throw?
I started with Abraham Lincoln. He is reputed to have written the following: “Who can be more nearly a fiend than he who habitually overhauls the register of deeds in search of defects in titles, whereon to stir up strife, and put money in his pocket?” Some things never change.